Update Pay Levels as Talent Market Tightens

Employers have enjoyed a bit of a holiday from meaningfully raising workers' pay over the past few years, but in business—as in life—nothing lasts forever.

Organizations felt little pressure to update their compensation structures while economic growth was steady but slow, inflation was low, and the unemployment rate was slowly declining. As wages remained relatively flat in most industries and regions, simply giving employees a small annual raise or bonus—if even that—was enough to keep things running smoothly.

With economic growth picking up, however, it's becoming dangerous to neglect compensation. Earlier this year, U.S. Federal Reserve chair
Janet Yellen announced that the U.S. economy is approaching full employment—that is, most everyone who is able and willing to work should be able to find a job.

A Changing Labor Market

The economic news is already changing the labor market and affecting employees' willingness to switch jobs. The number of
employees quitting their jobs increased for the seventh year in a row in 2016 to 36.1 million, according to data from the U.S. Bureau of Labor Statistics. The quit rate increased from January 2016 to January 2017 for employers in both the West (from 2.1 percent to 2.5 percent) and the Midwest (2.0 percent to 2.3 percent), while remaining steady, for now, in the Northeast (1.6 percent) and the South (2.3 percent).

Employers may see more voluntary turnover among employees and, as competitors try to hire from the same shrinking talent pool, more difficulty in attracting new talent.

At the same time, rising inflation is putting pressure on employers to make sure wages keep up. Consumer prices in the U.S.
increased 2.7 percent year-on-year in February 2017, the highest inflation rate since March of 2012.

Taken together, employers may soon have to pay a bit more to attract and retain talent, eclipsing
the 3.2 percent year over year wage growth forecast for the first quarter of 2017. At the very least, this current environment demands that employers make sure that their compensation structures reflect the current competitive environment.

Some employers have already taken steps to put new pay plans in place or to update existing plans. "Most of these employers are motivated to do so because they have lost a few key employees," said Katie Busch, SHRM-SCP, lead consultant with HR Compensation Consultants LLC in Boynton Beach, Fla. "In some cases, those losses are coming in positions with easily transferable skill sets." For example, departing employees might have technical skills such as software development that are useful and in-demand among employers in several industries.

How much work employers have to do to update their compensation programs will depend on how those employers have managed compensation over the past several years.

Here are steps that pay experts advise employers to consider.

Take a holistic look. To determine whether pay levels are in synch with the changing market, review the organization's entire pay structure.

An important first step is to verify that the jobs employees are doing reflect their job descriptions. "Companies change their goals and objectives over time and that trickles down to have an impact on jobs," said Lane Transou, SHRM-SCP, a Houston-based compensation consultant.

See where you are in the market. Employers that haven't updated compensation levels in some time need to know where they stand relative to the market. That means reviewing how what you pay for each job compares to what other employers in the market are paying for the same or a similar job.

Address problem areas. Once the market analysis is done, identify the differences between the organization's current pay levels and what the market pays. In some cases, employers may find that their entire pay structure is out of step with the market. Others may find that pay is less competitive in only certain jobs or locations.

Find ways to address any market-based discrepancies in pay. "Employers can begin by identifying their most critical jobs and making pay adjustments as quickly as possible," Transou said.

Depending on how much adjustment is necessary, pay levels can be shifted over time—assuming the pay structure doesn't discriminate against a certain class of workers, such as women; in these instances, pay discrepancies should be addressed immediately.

If employers can't afford to match what the market is paying for a job, they might consider paying 5 or 10 percent below the market to start with, and then increase the pay through subsequent raises.

"By making incremental changes over time, the employer might be able to get the plan to the desired end state over a three-year period," avoiding an immediate pay shock bigger than the organization can absorb, Busch noted.

Joanne Sammer is a New Jersey-based business and financial writer.

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